BILL ANALYSIS Ó
AB 261
Page 1
Date of Hearing: April 25, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 261 (Dickinson) - As Introduced: February 7, 2011
Majority vote.
SUBJECT : Property tax: sale of tax-defaulted property.
SUMMARY : Clarifies that prescriptive easements run with the
tax-defaulted property sold in a tax sale and provides that a
proceeding based on alleged invalidity or irregularity of a sale
of tax-defaulted property may only be commenced by a recorded
interest holder or his/her successors, as specified.
Specifically, this bill :
1)Specifies that, in the case of a tax-defaulted property sale,
the title conveyed to the purchaser is not free from
prescriptive easements or easements of any kind, among other
liens and encumbrances.
2)Provides that a proceeding based on alleged invalidity or
irregularity of a tax lien sale may be commenced only by
recorded interest holders and their successors in interest in
the real property sold at the challenged tax sale.
EXISTING LAW :
1)Requires a property owner to pay property taxes to the
treasurer or tax collector of the county within which the
property is located.
2)Provides that, if property taxes are not paid within five
years of the notice of impending default, the property becomes
subject to sale and will be sold at a public auction. The tax
collector has the power to sell property that has been
tax-defaulted for five years or more, or three years or more
in the case of nonresidential commercial property.
Tax-defaulted property may be sold under either of the
following procedures, each with distinct statutory
requirements:
a) Sale to private persons (including taxing authorities)
AB 261
Page 2
by auction ÝRevenue and Taxation Code (R&TC) Section 3691
et seq.]; or,
b) Sale to state and local taxing agencies by agreement
(R&TC Section 3791 et seq.).
3)States that, when tax-defaulted property is sold, the deed
conveys title to the purchaser free of all encumbrances
existing before the sale, with specified exceptions, including
an exception for certain easements, such as servitudes upon,
or burdens to, the property, water rights (the record title to
which is held separately from the title to the property) and
restrictions of record.
4)Specifies that a proceeding based on alleged invalidity or
irregularity of any proceedings instituted in a sale of
tax-defaulted property can only be commenced within one year
after the date of execution of the tax collector's deed.
FISCAL EFFECT : Unknown, but Committee staff estimates that this
measure will have no impact on the State General Fund revenue
and may potentially generate cost savings for counties.
COMMENTS :
1)Author's Statement . The author states that, "AB 261 is a
modest measure bringing clarity and legal certainty to the
complex area of tax lien sales of real property, ultimately
protecting taxpayers."
2)Argument in Support . The proponents of this measure argue
that AB 261 is a simple, common sense measure that "provides
protections for counties conducting tax lien sales by ensuring
that third parties cannot initiate or intervene in litigation
to invalidate tax sales without cause."
3)Sale of Tax-Defaulted Property . Property is deemed in default
if property taxes are not paid when due and is subject to
penalties and costs. Once the real property is declared
tax-defaulted, the county tax collector publishes the
information on the defaulted roll. If the owner fails to
redeem the property within five years (or three years if the
property is also subject to a nuisance abatement lien) by full
payment of the defaulted taxes, interest and penalties, then
the property may be sold to the highest bidder at a public
AB 261
Page 3
sale. The county tax collector's power to sell arises by
operation of law in order to satisfy the defaulted taxes.
After the power to sell arises, the tax collector is required
to record a Notice of Power to Sell with the county recorder's
office. Once the property becomes subject to sale, the county
tax collector must attempt to sell the property in order to
collect the defaulted taxes. The property may be offered for
sale at public auction, a sealed bid sale, or a negotiated
sale to a public agency or qualified non-profit organization.
Public auctions are the most common way of selling
tax-defaulted property, and the property is sold to the
highest bidder. Generally, if no bid was received when the
property was last offered for sale at public auction, the tax
collector may re-offer property at a reduced price at the same
or next scheduled sale.
4)What Does This Bill Do ? AB 261 is intended to accomplish two
things: clarify the rights of unrecorded prescriptive
easement holders when title is conveyed in a tax lien sale and
limit the ability of certain third parties to challenge the
validity of a tax lien sale.
5)Title Conveyed in a Tax Sale . Existing law provides that a
title granted by a tax deed pursuant to a valid sale of
tax-defaulted property is free of all encumbrances of any kind
existing prior to the sale, subject to certain enumerated
exceptions. One of those exceptions is an easement
constituting servitude upon, or burden to, the property.
(R&TC Section 3712).
a) The Definition of Prescriptive Easements . An easement
is merely a right to use the land of another - "a
restricted right to specific, limited, definable use or
activity upon another's property, which right must be less
than the right of ownership." ÝScruby v. Vintage
Grapevine, Inc. (1995) 37 Cal.App.4th 697, 702]. The
easement holder possesses the right to use land owned by
another person for a specific purpose. Easements are
usually obtained through a written agreement, but a
prescriptive easement is acquired through continuous use of
another person's property, without the owner's permission,
for a period of five years under California law. Thus, a
prescriptive easement is an easement that has not been
recorded. To establish a prescriptive easement, a
plaintiff must show by clear and convincing evidence: (i)
AB 261
Page 4
open, notorious, and uninterrupted use; (ii) hostile to the
true owner; (iii) under the claim of right; (iv) for the
statutory period of five years. ÝSilacci v. Abramson (1996)
45 Cal.App.4th 558, 563; Applegate v. Ota (1983) 146 Cal.
App. 3d 702, 708].
"Whether the elements of prescription are established is a
question of fact for the trial court, and the findings of
the court will not be disturbed where there is substantial
evidence to support them." ÝWarsaw v. Chicago Metallic
Ceilings, Inc. (1984) 35 Cal.3d 564, 570]. Generally, the
scope of a prescriptive easement is determined by the
actual use of the easement during the statutory period.
ÝThomson v. Dypvik (1985) 174 Cal. App. 3d 329, 340].
Courts may increase the scope of a prescriptive easement
when it allows necessary use by the party seeking the
easement without the imposition of a substantially greater
burden on the owners of the property. (Applegate v. Ota,
supra, 146 Cal. App. 3d at p. 711). The land to which an
easement is attached is called the dominant tenement, and
the land which bears the burden, i.e., the land of another
which is used or enjoyed, is called the servient tenement.
ÝCity of Anaheim v. Metropolitan Water Dist. of Southern
Cal. (1978) 82 Cal.App.3d 763, 767-768].
b) What Happens to a Prescriptive Easement When the
Property (Servient Tenement) Is Sold ? Generally, when the
owner of land burdened by an easement sells or leases the
property, the purchaser or lessor, who has notice of the
existing easement, takes the land subject to that easement.
If the new owner or lessee takes the land without notice
of the existence or use of the easement, and with no
knowledge of facts sufficient to put him/her on inquiry
notice concerning it, he/she will take the land free from
the burden. An issue that arises in these cases is whether
the easement is sufficiently apparent to charge the
purchaser with constructive or inquiry notice. Inquiry
notice means that a prudent person possessing ordinary
faculties would be bound to notice any open or notorious
use of the property by another person, and would make
further inquiry regarding that use.
Generally, an owner of property burdened by a prescriptive
easement has significant disclosure obligations to a buyer.
In a tax sale, however, no notice regarding easements of
AB 261
Page 5
any kind is included as part of the disclosures required to
be provided to prospective bidders or as part of pre-sale
announcements at the tax sale, even though a general notice
is given. It is the duty of the buyer to do his/her due
diligence with respect to this issue. Prospective bidders
are instructed to research the property at the
clerk-recorder official records and investigate
encumbrances listed in R&TC Section 3712 that will remain
with the property. Prospective bidders are also instructed
to visit and inspect the property and contact the local
planning department to verify the allowed use of the
property before they bid.
c) Clarification of Existing Law . AB 261 would clarify
that prescriptive easements stay with the property sold at
a tax sale. Just like in a regular sale, if the purchaser
of a tax-defaulted property had notice of the existence of
the prescriptive easement, or the use of the property by
others, he/she would take the property subject to that
easement. However, if the purchaser had no notice of the
existence or use of the easement, and no knowledge of facts
sufficient to put him/her on inquiry notice concerning it,
he/she will take the property free from the burden. A
person with an unrecorded prescriptive easement may,
nonetheless, enforce his/her interest against the buyer as
long as he/she is able to prove the existence of the valid
prescriptive easement.
6)Challenging a Tax Lien Sale . Pursuant to R&TC Section 3725, a
proceeding to challenge the validity or irregularity of a tax
deed sale must be initiated within one year after the date of
execution of the tax collector's deed. The section, however,
does not specify who may initiate the proceeding.
a) Case Law . Recently, the County of Sacramento defended a
case, in which a person who did not have a recorded
interest in the property sold at a tax sale contested the
sale. ÝHelen Lee v. Robert and Shirley Lyles and County of
Sacramento (2010); Case No. 05AS01166]. One of the issues
in that case was whether the alleged easement holder had
the right to challenge a tax sale of a property in which
the easement holder had no recorded interest, such as, for
example, a prescriptive easement. According to the author,
the court struggled with the issue but reasoned that, since
R&TC Section 3725 is silent on the issue, anyone, including
AB 261
Page 6
the alleged easement holder, has standing to sue the county
and challenge a tax lien sale. Counties are concerned with
the court's decisions to allow unrelated third parties to
bring legal actions to undo transactions in which those
parties have no legal interest, at great expense to the
counties.
b) Proposed Solution . Effectively, this bill would
overturn the court's decision in Helen Lee v. Robert and
Shirley Lyles and County of Sacramento regarding the
plaintiff's standing to challenge the tax lien sale and
would limit the ability of unrelated third parties to sue
counties and challenge a tax lien sale. Specifically, AB
261 provides that only recorded interest holders and their
successors in interest in the real property sold at the
challenged tax sale may institute a legal proceeding and,
thus, denies standing to challenge a tax lien sale based on
irregularities to holders of unrecorded interests in the
property, including prescriptive easements. People with
unrecorded prescriptive easements would still be able to
enforce their interests against the buyer, as long as they
could establish the existence of the easements. Arguably,
they would not be interested in blocking the tax sale as
long as other avenues of asserting their rights exist.
Committee may wish to consider amending this bill to
clarify that it applies prospectively only to those
proceedings that are initiated on or after the effective
date of this and that it will not affect existing
litigation.
c) Does the Proposed Solution Work? Generally, a county
conducting a tax sale does not know how many potential
holders of unrecorded interests in the tax-defaulted
property could challenge a sale. It is understandable that
counties would like to avoid litigating cases brought by
holders of prescriptive easements challenging the validity
of a tax sale. However, it is unclear whether the proposed
solution would even accomplish the goal of denying holders
of unrecorded prescriptive easements standing to challenge
the validity of a tax sale.
The issue of whether a party has standing to sue is a
jurisdictional issue to be decided by the court. ÝWaste
Management of Alameda County, Inc. v. County of Alameda
(2000) 79 Cal.App.4th 1223, 1232 (standing is a
AB 261
Page 7
jurisdictional issue that must be established in some
appropriate manner)]. As a general principle, courts have
consistently held that, to have standing, "a party must be
beneficially interested in the controversy; that is, he or
she must have some special interest to be served or some
particular right to be preserved or protected over and
above the interest held in common with the public at
large." ÝHolmes v. California Nat. Guard (2001) 90
Cal.App.4th 297, 314-315; see Coral Construction, Inc. v.
City and County of San Francisco (2004) 116 Cal.App.4th 6,
9-10]. It is true that courts are bound by statutory
limitations imposed on standing where they plainly apply
ÝResidents of Beverly Glen, Inc. v. City of Los Angeles
(1973) 34 Cal.App.3d 117, 123], and that standing
requirements may vary "from statute to statute based upon
the intent of the Legislature and the purpose for which the
particular statute was enacted." ÝMidpeninsula Citizens
for Fair Housing v. Westwood Investors (1990) 221 Cal. App.
3d 1377, 1386]. Prescriptive easements do not have to be
recorded to be valid interests in real property, although
an easement holder may "perfect" their easement by a
recording. Given that the holder of a valid prescriptive
easement clearly has an interest in the underlying
property, this bill could potentially be viewed as
infringing upon that holder's due process rights. In other
words, it is not clear whether a court would uphold this
bill's limitation on standing in all cases.
d) The Scope of this Bill: Is It Too Broad? By limiting
the right to challenge in court the validity of a tax sale
only to holders of recorded interests, this bill would
affect not only the holders of unrecorded prescriptive
easements but also other persons who may have an interest,
albeit unrecorded, in the property sold at a tax sale. For
instance, a person who bid on a tax-defaulted property at a
public auction and lost due to some irregularities in the
tax sale, would be prohibited from bringing a lawsuit to
challenge the validity of that sale, under this bill. The
Committee may wish to consider whether the scope of AB 261
is too broad and whether the prohibition should be limited
only to holders of unrecorded prescriptive easements.
REGISTERED SUPPORT / OPPOSITION :
Support
AB 261
Page 8
California Association of County Treasurers and Tax Collectors
(Sponsor)
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098